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Slater & Gordon – The ‘Pile ’em High’ edition.

As the supermarket concept developed in the UK in the 1950s, the appearance of brand names developed as well and were designed to be colourful, eye-catching and distinctive.

Buying a supermarket with a run down image and rebranding it was a popular pastime for investors. You only bought property, and a fairly low skilled task force, but the theory was that by rebranding your carrots with the name of a trusted retailer – perhaps washing them and upgrading the packaging – the customer, who still needed to buy a carrot near to home, would pay a tad more and you would ‘enhance profits’.

Fortunes were made on the stock market; entire chains of supermarket changed hands and were ‘rebranded’; the carrots were peeled for you; chopped into batons; mixed with some chopped up Kale and relabelled as ‘Stir fry’ for the busy housewife.

You can do that with carrots and bags of soggy yellow cabbages – but then someone decided that you could do the same thing with lawyers. Slater & Gordon went to the market for money for ‘acquisitions’; they were going to buy up law firms around the world and rebrand them. The future was golden.

However, lawyers are of many highly individual varieties; the David Price’s and Alan Collins of this world got to head up major firms because they were exceedingly good at specific areas of the law – and tempting though it may be to refer to them as vegetables…Whoops! Did I just suggest that a feared libel lawyer resembled a decomposing cabbage? Plough on, Ms Raccoon, plough on, perhaps he won’t notice.

The mistake investors made was in assuming that all ‘carrots’ are equal. That Slater & Gordon was just another publicly listed acquisition vehicle for rebranding and ‘piling it high’. They failed to register that in buying the legal firms, S & G were in effect paying the carrots to vacate the premises.

When Russell, Jones and Walker were bought by Slater & Gordon for £53.8M the expected turnover for the following year was predicted to be £53m, with earnings before interest, tax, depreciation and amortisation of £10.9m.

The 19 equity partners received £27.6M in cash initially, with another £8.8M promised provided they behaved themselves over the next two years. In addition they were to receive what was billed at the time as ‘£17M in S & G shares’ – but they couldn’t sell them for another two years. As of 1st of May, the equity partners are free to sell those shares. Those £17M quids worth of bonus shares are now worth less than half a million pounds split between 19 of them…

At the time of the deal, it was said:

All of RJW’s principals will ­continue to work in the new business [but] there were ‘no guarantees’ about whether the partners might then move on.

You don’t get to be an ‘equity partner’ unless you have spent years slogging away to build up your reputation and your law firm. Ipso, equity partners tend to be heading towards, or careering past, retirement.

If you had spent years building up your own company, and were of retirement age when someone came along and offered you a million pounds in hard cash for the company, and some shares – how likely would you be two years later, after watching those promised shares nosedive faster than an asteroid, to hang around and help the new owner recover the business from the hole he had driven it into? Hmm, me neither.

Which may explain the slight difference between the new accounts for Slater & Gordon (Australia) and Slater & Gordon (UK) – see if you can spot the difference between the UK accounts released a few days ago…

“The directors, having given consideration to the current financial forecasts for the group and the company, the engagement with the banking syndicate and its financial advisers, the comprehensive review and the performance improvement programs being implemented by management, consider the going-concern basis of preparations is appropriate for a period to 31 March 2017.“

Or the version from the February Australian accounts…

“The directors, having given consideration to the current financial forecasts for the group and the company, the engagement with the banking syndicate and its financial advisers, the comprehensive review and the performance improvement programs being implemented by management, consider the going concern basis of preparations is appropriate.”

The implication of the additional words ‘for a period to 31 March 2017’ is significant, because although there are rumours that Slater & Gordon may have reached agreement with ‘some’ of their bankers, currently owed a cool AUS$740 million, unless they reach agreement with all of them, they have to repay that AUS$740 by 31 March 2017….

Westpac Banking Corp, which is the leader of the Slater & Gordon syndicate, said its stressed exposure in property and business services increased by about $300 million. It is generally accepted among banking analysts that this refers to the Westpac exposure to Slater & Gordon. The notes to the table which disclosed this amount said it related to one client facility downgrade. That means Westpac has impaired the loan.

Westpac is also one of the major bankers impacted by the new ‘user pays‘ model to finance regulation. Banks, financial advisers and brokers would be hit with more than 80% of the regulators costs expected to reach $350 million this year.

Tough times ahead for Westpac and the other banks.

If I worked for Slater & Gordon, I would be very worried indeed.

But then again – if I held Slater & Gordon shares in lieu of part of the purchase price of my once respected company – I wouldn’t be cashing them in on the 1st May. I’d be hoping that S & G were so desperate for cash this time next year that I might be able to buy my old firm back for a fraction of the price S & G paid for it.

Just spent half an hour looking at Slater & Gordon (UK) 1 Limited’s accounts – they seemed to have spent about £600m on acquisitions, but had to write off £269m before the year was out (“impairment of goodwill”). There must be some extremely red faces around!

Its gonna take a while to sink in and loads of money is gonna be lost and many tears will flow but the penny will ultimately drop that a professional service is not a simple physical commodity. Could be Law/Medicine/ Vet Med/Banking or whatever …..its about individual ability and integrity and that means personal responsibility and if need be personal accountability. Mind you Anna if someone owes a bank £1000 then its the borrowers problem …..if someone owes the banks AUS$ 740 milo then its the bank that has the problem. Be really interesting to know what physical assets (apart from dusty files and info on hard disk) forms the security for the loans. But the banks are not without a hand to play …..they might enjoy playing chicken with the Law Society here and in Australia …..seems funny to someone of my generation that the future of the British Steel Industry is decided at a board meeting held somewhere the Middle East or India and the future of one sector of the English Legal System might be decided by a board meeting of a bank in Australia.Seems as if the powers that be have come to favour a man made version of chaos theory

To rephrase an oft-used joke from the 1970s financial markets: “If you want to buy a small international compensation law practice – buy S&G – and wait…”

The only problem is that the contingent liability (devaluation of the goodwill by association with S&G) will ensure that the reputation will have suffered in the meantime. But hey; pennies are pennies. The ex-partners should be able to buy their firm back for far less than the lockout haircut they rec’d by being paid in what is now effectively wampum…

@Robert Edwards (devaluation of the goodwill by association with S&G) Easily overcome by rebranding and with good PR it will seem as if they are ‘white knights’ @Robert Edwards So, nothing sneaky at all; merely good business. In one sense I agree though I rather doubt it was foreseen. I suspect S&G had the ‘master plan’ for ‘world domination’ of the P.I. market and the Partners at Russell Jones and Walker must have been pleasantly (to say the least) surprised when they had a keen buyer for the whole of their equity. The Equity probably won’t have been shared equally and the more senior partners will have looked to cash out permanently. the more junior partners may even have felt a bit hard done by but it seems their time may yet come

When the Maxwell ‘ Empire’ (snork) was dismantled, virtually every viable asset was flogged off for pennies in the pound. I know this, because I worked out an acquisition plan for a minor publishing imprint. Needless to say, I didn’t get it, but all of it – real estate, working companies, etc., were banged out in a highly questionable manner, simply because there was the perception that there was undeclared secondary debt on these…

@Robert Edwards I have seen it too ….its those that actually know and understand a business that can identify hidden value and exploit it that do well out of a meltdown of a business. I doubt the financial engineer who put the present S&G together had ever grafted at the coalface of the law …..ever picked up a case file let alone an ‘old dog’ file which had been shunned because it was too much work for too little reward or opportunity had been missed and to ‘get it up’ took time away from generating profit costs …..cases were probably no more than just numbers on a computer print out and employees little more than a pay code. Such is the view when one tries to commoditise a profession or, if one likes to take a broader view, people, their lives and their problems. Shame really because the practice of a profession is such a personally enriching experience in the non monetary sense of that expression but its about money now and not understanding people or the craft …..to me personally thats a rather dull way to spend ones life as if everything must be seen through the prism of maximun personal financial profitability. Don’t get the idea I am advocating selflessness but I am critical of reductionism ….if one likes in Kantian terms the inability to distinguish between price and dignity or in less pompose terms those who know the price of everything and the value of nothing

It’s very weird that S&G with its deadline of 31/3/16 had to give the banks a financial plan good enough for the banks to browse through and make their minds up on 30/4/16 so with just 8 days to go and the Banks have been given absolutely nothing to read & to decide if they will be asking for payment in full by April 2017.

I see the shares are jumping up & down like demented Yo Yo’s, so whose buying? Two Chinese men buying & selling millions of shares over a 24 hour period. So the share price would be floating just above zero if it wasn’t for the Chinese trying to gain a very quick profit which has kept the shares artificially higher than they would be.

It looks like a done deal that S&G in the UK are doomed after putting out “That Statement” a going concern only until April 2017!! *Gasp* *Zoiks*

What will become of the infamous chief Foghorn & Ambulance land speed record holder Liz Duz?? No Doubt ITV’s “This Morning” might let her sleep on the couch of a night time? No more day time stories with MW-T either. The Double act will be no more

So it’s looking like a Fire sale will be happening sooner than later so I’ve got my eye on Liz Dux’s Laptop ( bargain ) Win Win eh!!